Market Update: Even Jerome Powell doesn’t know what’s going on with the economy – Full Analysis

In normal times, the Federal Reserve would more or less ignore an oil price shock like the one we’re in now.

Oil is notoriously volatile, and high prices inevitably come down to earth after too long, making any Fed policy action on energy prices more or less moot.

But these aren’t normal times.

Fed Chair Jerome Powell on Wednesday noted that tariffs – another economic annoyance the Fed typically “looks through,” to use the fedspeak term – had already clouded the central bank’s ability to see what’s going on.

If you think of tariffs as a translucent sheet of glass and you add oil’s translucent glass behind it, you basically have an opaque economy that the Fed can no longer “look through.”

That’s why Powell used the word “uncertain” seven times during his press briefing and twice in the Fed’s policy statement Wednesday. He just doesn’t know what’s happening with the economy.

And if Powell, America’s top economic policymaker, doesn’t know, God help business leaders and consumers trying to make it through this environment. That uncertainty is why economists are increasingly worried that companies may pause their hiring plans and consumers may rein in spending. It’s not exactly a great time to spend money, especially if you don’t know if the price surge is a blip or long-lasting.

Powell was uncertain about a lot of things this week: inflation, the job market, the path of interest rates, AI, tariffs, the housing market and now the Iran war.

He even said he was uncertain about how long he’d stick around in his job.

The central bank chief lamented that it seems to have been one thing after another with this economy.

“It has been five years, and we had the tariff shock, the pandemic, and now we have an energy shock of some size and duration. We don’t know what that will be, actually,” Powell said.

Economic projections this week from Powell and the other members of the Fed’s Open Market Committee looked a lot like their last projections in December. Inflation was very slightly higher this time around. So was economic growth. Unemployment and interest rates were exactly the same.

The lack of change is because of a lack of clarity, Powell admitted.

“I wouldn’t say there is a conviction that this is going through quickly or not quickly,” Powell said about the oil price spike. “You have to write something down (for quarterly projections). And this is something that people wrote down.”

The haziness is showing up in every aspect of the economy.

Jobs: Powell noted that a massive nurses strike probably messed with last month’s data – but so did the lack of immigration.

Taken together, Powell said the seemingly weak labor market has the “feel of downside risk” to the economy, but he acknowledged uncertainty about the job market’s breakeven point – the number of jobs it needs to add to keep up with population.

Inflation: The Fed has so much uncertainty about inflation that the possibility that the central bank may need to raise rates at its next meeting came up during the committee’s discussions.

Tariffs: Powell has said for the better part of a year that tariffs probably wouldn’t cause inflation. That’s because they set a new, higher price, and that’s it. The prices don’t keep rising. But Powell noted Wednesday that the Fed had expected tariffs to work their way through the economy by now, and they still haven’t, which is something of a mystery to policymakers.
Now, Powell said, he’s not sure he was right about that one-time thing.

“I would not use the word certain about my views on that,” he said. “I’m not certain. I’m uncertain.”

AI: Productivity is increasing in the economy, but it’s way too early to tell whether that’s because of AI or something else, Powell said.

“We won’t know for years what it is due to,” Powell said.

Actually, it’s too early to see any effects of AI in the economy so far, he acknowledged. AI-related productivity gains could let the Fed cut rates in the future, but that’s a tough call until the Fed has clarity on what’s causing it.

Housing: Powell acknowledged he was befuddled by persistent gains in housing prices, considering the job market was weakening.

“It is frustrating,” Powell said. “It is a good question about why we didn’t see much of that last year.”

Oil: “Traditionally, prices go up and back down,” Powell said. “I don’t have tons of confidence on that. I think the theory is right.”

“The time it takes to get all the way through the economy is very uncertain,” Powell added.

His term of service: Powell also said he wasn’t sure how long he’d stay in the job. The Trump administration is criminally investigating him and the Federal Reserve in an extraordinary probe related to the Fed’s expensive renovation. He said he’d stick around until the probe was “well and truly over.” He also said he’s remain as Fed chair until a new one was confirmed – a process that could be held up by the investigation.

Whether he’d serve out the rest of his term as a Fed governor, which expires in 2028, after the investigation is completed and a new Fed chair is in place … Powell said he hadn’t decided.

Just like practically everything else about this economy.